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US sanctions create additional tensions in Lebanon

Event

This month Lebanon's central bank chief stated that local banks will comply with the new US sanctions targeting Hezbollah. In December 2015, the US Congress passed new sanctions against Hezbollah, designated a terrorist organisation by the US. An important objective of these sanctions is to prevent Hezbollah from gaining financial benefit following the lifting of the nuclear sanctions on Shia Iran, which may then provide additional aid to its proxies in the region. Unlike in the past, the US sanctions now apply to individuals and institutions not under US jurisdiction and threaten bar banks that knowingly engage with Hezbollah from the US financial market. As the majority of Lebanon's trade is conducted in dollars and the country is reliant on remittances from abroad, the Lebanese banking sector is under pressure to close all bank accounts of Hezbollah members and affiliates. In June, a major Lebanese lender – the Banque du Liban et d'Outre Mer (BLOM) – was hit by a bomb attack as it begun closing accounts linked to Hezbollah. This can be interpreted as a signal that Hezbollah will respond (violently) to the implementation of the US sanctions.

Impact on country risk

The US sanctions represent a threat to Lebanon's most powerful group Hezbollah to maintain its internal Shia support base. The organisation has multiple intermediaries at the political, economic, and social level, e.g. schools, hospitals and media companies. The US sanctions may lead to a cut in Hezbollah’s popular social services as its institutions need access to banking services in order to operate. As a result, large parts of the Shia community are likely to be affected, which might reduce Hezbollah’s popularity. Therefore, Hezbollah is likely to try to delay the implementation of sanctions, possibly with military force, as illustrated by the bomb attack against BLOM. However, this month’s announcement of the Lebanese Central Bank shows that the banking sector is likely to maintain compliance with the US sanctions. Failure would cut off the banking sector from the global system while all Lebanese banks rely on international connections. In addition, non-compliance could create a cascade effect over the Lebanese economy as the banking sector, an important sector in Lebanon, is heavily financing the structural fiscal deficits (forecasted at -7.8% of GDP in 2016) and high government debt (expected to amount to 142.6% of GDP in 2016). Consequentially, the US sanctions have ignited an unprecedented stand-off between the severely armed Hezbollah and the banking sector, a pillar of stability in Lebanon. These sanctions are adding tensions in a country already plagued by low economic growth (estimated at 1% in 2016), elevated structural current account deficits (projected at -21.4% of GDP in 2016), a political stalemate and a difficult security environment.